Triple Theta, Half The Time

by John A. Sarkett

Here’s a turbocharged option strategy.

Francisco Antonio Urrutia, a former banker with a penchant for a single index option and risk management, has been generating stupendous returns for the past three years. In this niche of option exotica — several thousand individuals exclusively trading the Russell 2000 (Rut) condor — where 100 condors per month is deemed large and carries a $100,000 theoretical risk, he does five or 10 times that size on a monthly basis, and profitably. Spread across 10 different accounts, he has averaged 10% to 15% monthly returns against reg-T margins in fewer than four years. How did he get interested in the rare topic?

Turning points
“We were living in Celebration [FL], exploring market opportunities, [and] I happened to see an ad on television about an option mentoring seminar,” Urrutia explained. He met Dan Sheridan, founder of Sheridan Options Mentoring (Som). After nearly 25 years as a Mercury Trading market maker specialist in the Cboe pits, Sheridan founded his company in 2007. Now, Som serves an average of 150 students daily via webinar.

Urrutia said that he and his wife started the mentoring program with Sheridan, studying income strategies. They stuck with Sheridan’s rules and followed his advice to stay with one-contract trades. The “rules” include stringent risk management, including predetermined entry points, predetermined max loss, predetermined adjustment points — and nothing by the seat of the pants.

After paper-trading in 2006, Urrutia scaled up, again per the Sheridan method. He moved from paper-trading to trading one contract, and then, after time, 10 contracts. At the end of 2006 he moved to 20s. He stayed with 20s for the first six months of 2007, then moved to 50s. In the third year, he moved up to 100s, eventually to his current 500-contract size. How did he fare in the terrifying markets of 2008? “I was forced to better apply the golden rules, and then I profited more,” he said, adding that when the Dow Jones Industrial Average swings big in a day, there are more profit opportunities, not fewer.

By this time, Urrutia was able to amalgamate the different strategies he learned into one powerful vehicle: the Russell 2000 index (Rut). Simply, on a condor base, he usually, but not always, layers a butterfly and a calendar. (More on this later.)

When the market makes big moves, especially down, everything comes down, Urrutia says. “So if everything was correlated anyway, for me it was easier to trade only one index instead of having positions in different indexes as diversification. I consider the different strategies within the Rut as diversification myself.”

He continues, “Today we trade condors, both high and low yield, butterflies and calendars in the Russell 2000. We manage our positions by the greeks.

“We trade 500 contracts in the front month and 500 contracts in the next for condors under normal conditions. We put on a high-probability condor, selling deltas from seven to 10, at 50 days to expiration, and also put on low-probability condors at about 30 days, as the expiration month becomes the front month.”

According to Sheridan’s definition, a low-probability condor starts with deltas on the short strikes at 14–18, and a typical life span of 30 days, plus or minus. A high-probability condor starts with deltas at 10 or less and a life span of some 50 days. The “high” and “low” monikers serve only to separate the two condor types, Urrutia adds.

“We also place a 20% to 30% ratio in butterflies and calendars, at the money, half and half, depending on the volatility — for example, if he has 100 condors, he might also have 20 to 30 total of butterflies and calendars. The Rut butterflies are set 50 points wide on each side — for example, 550/600/650 on the Rut. The lower the volatility of the Rut, the higher the ratio. When markets are wild, we scale back: we trade one third of this position when conditions are high risk.

“We enter the trades as whole positions: condors, calendars or butterflies,” Urrutia concludes. “Nothing fancy. We aim to collect $2.50 to $3.50 for low-probability 14–18 short strike delta condors vs. $1.00 to $1.25 credit for a high-probability 10 delta or less short strike condor.”

“In my experience you can get in more trouble trying to time the market,” Urrutia remarks. Taught to be a creature of habit to harness the probabilities, he enters his condor positions 50 or 30 days out, for “high prob” and “low prob,” respectively. He is in the market every month. But before doing so, he does his homework and makes some crucial considerations.

Technical analysis
Urrutia looks for support and resistance, using simple trendlines, moving averages plus Fibonacci retracements — and a sense in “knowing” the Rut from watching it and only it all day, every day. If the Rut is butting up against resistance, he will be somewhat short deltas. Conversely, if the Rut is at support, he will be long deltas. (This may happen only a few times each year, Urrutia adds.)

What if the Rut is smack in the middle? A balanced sale results, and a delta-neutral position.

Order entry
Unlike many condor traders, Urrutia enters the four-legs as one order. “I am willing to give $0.10 to $0.15 from the midpoints to do this, managing the position rather than trying to squeeze out a few more cents on the entry,” he says. “The money is made in the risk management.”

Creating more theta, reducing vega
At the same time his condor is executed, Urrutia will add both a butterfly and a calendar spread, at a 20% to 30% ratio — that is, 10 condors to two or three calendars and butterflies (combined). He does this to increase his theta (decay) and increase his vega (reduce his volatility risk).

Why not butterfly or calendar? The reason: the at-the-money butterfly is positive theta but negative vega. That means if volatility shoots up, the butterfly loses. The at-the-money calendar is positive theta also, but positive vega. That means if volatility shoots up, the calendar benefits. Using both, increases theta while dampening down volatility (vega) risk.

So far, so good. What about when the market moves? What about adjustment?

First, Urrutia makes himself less vulnerable to adjustment than most condor traders because his intention is to be out of the trade one week from the Monday after expiration — sum total of exposure time: nine days.

This alone is a sharp difference to the 12- to 14-day elapsed time in the typical low-prob condor trade favored by some, and the 30 to 49 days favored by others in the high-prob condor (selling options with 10 deltas farther, with a higher probability of those strikes not being hit). He cuts his time exposure alone by 25% to 82%!

Can this be accomplished on a regular basis? “Sometimes faster,” he says. “It depends on the market, the greeks, the days of the week, but 10 days is a good target and often achieved.”

Market velocity is the key as to which adjustment Urrutia makes. If the market does nothing, he does nothing, and sits and collects theta — the best of all possible worlds for the condor trader. However, if the market is moving up but in a controlled fashion, and Urrutia finds himself short deltas, he will get long deltas by:

Conversely, if the market is moving down but in a controlled fashion, and Urrutia finds himself long deltas and losing money, he will get short deltas by:

When? If low-prob condor short strike deltas hit 30 or high-prob short strike deltas hit 20, Urrutia is adjusting, but as an experienced hand, he uses discretion to temper these rules. Does he try to be delta-neutral? No. Usually, it is sufficient to cut his deltas in half to two-thirds, expecting the ebb and flow of the market to come back his way.

If the market starts moving with strong velocity and it is early in the position, Urrutia will exit his butterfly at the breakeven points, as well as his short credit spreads. He will wait 24 to 48 hours to see if the Rut can stay within a standard deviation daily move for one to two days, and then reenter his position. If it is still moving rapidly, he waits. Better to wait than lose more, he says.

In addition, if the market goes through his resistance point on the upside, or support point on the downside, he exits that side of the trade. He again waits 24 to 48 hours, then determines if he will replace that side of the trade higher (or lower).

Surprisingly, Urrutia says most months in the past two years have required no adjustment. But his battle plan is always in place.

Expected returns
Target: 10% to 15% return per month, and 20% to 30% or higher with a portfolio margin account. Lofty goals that a hedge fund manager would kill for, but for Francisco Urrutia, who started small, followed the rules, and scaled up gradually, attainable.

John A. Sarkett is the creator of Option Wizard software ( and author of Extraordinary Comebacks: 201 Inspiring Stories Of Courage, Triumph, and Success, as well as the sequel (see or He may be reached at For more about Dan Sheridan, see

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